(a) Discuss the possibilities of creative accounting and/or earnings management practices by Gasharpo Bhd.

(b) Explain two major consequences that could befall Gasharpo Bhd if earnings management has been engaged by the management.

(c) Discuss three mechanisms that can be applied to reduce the incidence of creative accounting and/or earnings management practices in Gasharpo Bhd.

Gasharpo Bhd is a publicly traded entity involved in the production and trading of natural gas and oil. The entity is currently struggling to maintain its previous trend in revenues and profitability due to the current economic environment. The chief financial officer, Mr Darzy, has recently become concerned about issues involving the accounting policy for revenues. He remembers discussions with the auditors about specific application of previously used criteria in recognizing revenues for Gasharpo Bhd. The auditors highlighted the requirements of MFRS 15 Revenue from Contracts with Customers and the implications on the current policy on revenue in Gasharpo Bhd. Mr Darzy is concerned that Gasharpo Bhd's current revernue policy may not be in compliance with the requirement of MFRS 15. He is also concerned that the accounting department may engage in creative accounting or earnings managements due to pressure to maintain the previous trend in revenues and profitability. In addition, many employees are also aware of managements plan to do some restructuring in minimizing the overall expenditures of the entity.

The chief financial officer has discussed this matter with the chief accountant, Mr Belo. Gasharpo Bhd's current accounting policy
is to recognize revenue once a contract has been signed. Mr Darzy is particularly concerned with the following contract entered into recently:

Gasharpo Bhd entered into a contract on 5 January 20X1 to construct an oil and gas storage facility on a customer's premisesfor a consideration of RM11,500,000 with a bonus of RM500,000 if it can be completed within 24 months.

At the inception of the contract, Gasharpo Bhd is aware that the completion of the storage facility is highly susceptible to the supply of certain components that is outside the entity's influence. However, Mr Belo insists on the recognition of the revenue at the inception date of the contract. Mr Belo also assures Mr Darzy that Gasharpo Bhd faces little risk of not being paid by the customers. He further argues that if any of the current and future contracts with their customers are not recognized, it may communicate to the public that Gasharpo Bhd is not able to maintain its previous trends in revenues and profitability, attract better employees and meet investors/analysts' expectations.

Answer rating: 100% (QA)

aThere are a few possibilities for creative accounting or earnings management practices by Gasharpo Bhd Recognize the revenue from the contract over time instead of at the signing of the contract This ... View the full answer